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INVESTING
IN RESIDENTIAL REAL ESTATE
As Realtors® in the Puget Sound Area, Lindee and
I see a great many people in the real estate market to buy or sell their own
residence; they are usually in the process of moving from one location or level
of residence to another. That
transaction usually results in the sale of one home to help purchase the next.
But, there are many of us
that are using real estate as an investment strategy. One of the most successful and
straightforward ways of investing in real estate is through the purchase of
single family homes for the purposes of renting.
Lindee and I understand
this particular form of investment because we have rental investments in this
area. Some of you may be intimidated by
the thought of owning more than one home, but the reality is it is one of the
safest and most productive investments there is!
All investments are a trade-off between risk and return. An investment with a high return will have a corresponding high degree of risk. On the other hand, a “safe” investment with low risk will offer a lower return or profit. Therefore, any investment is a compromise where each investor must weigh the different levels of risk and return for any given investment. One investor may be willing to take more of a risk in exchange for the potentially large returns, while another is more comfortable with safer, less risky investments. There is no perfect investment for all people. But one thing is for sure…. REAL ESTATE IS AS CLOSE TO PERFECT
AS YOU CAN GET OVER THE LONG TERM!
Despite the difficulties of
the current economy, real estate is still considered one of the most
substantial and successful investments. Especially in the Seattle real estate market!
Many people want to invest in real estate, but they just don’t know exactly how to get started. There is a lot of bad information out there, and people generally have lots of questions. To cover everything in an organized, logical manner, let’s look at the most common questions- and discuss the answers. Why
Invest In Real Estate?
There are truly many advantages of investing in real estate. More millionaires have made their fortunes in real estate than anything else! Here is what some Americans have said:
Let’s look at some of the advantages in more detail: 1.
APPRECIATION - Over
the past 80 years, real estate values have continually increased. There have,
of course, been some periods where values decreased, but the overall trend has
been nothing but up. Like anything else, the value of real estate is determined
by supply and demand. We have seen
unprecedented growth in value of homes in the
So what are the factors that have made real estate in such high demand over the years? One of the main reasons is that shelter is a basic human need. People need places to live, work, and shop where they aren’t exposed to the weather. In periods of high inflation, real estate values go up. Real estate is an investment that benefits from inflation. 2. LEVERAGE - A great thing about real estate is that you can tie up a big asset with a relatively small amount of money. You can easily buy a $100,000 home with only 10% ($10,000) down payment. To illustrate the power of this, consider this example: Suppose you bought $10,000 worth of gold, mutual funds, or some other investment. Let’s say that it goes up 10% for the year- not bad. Your investment is now worth $11,000. So your return is 10% of $10,000 = $1,000. Now lets suppose that you take that same $10,000 and put it as a down payment and buy a $100,000 house. Again, let’s say that it goes up 10% for the year. Your property is now worth $110,000! Your $10,000 investment increased by $10,000. That is a 100% return on your money (not even considering the equity build-up resulting from the constantly decreasing mortgage, cash flow, or tax advantages)! 3. TAX ADVANTAGES - You can deduct, as an expense, all of the interest, property taxes, insurance, repairs, inspections, and depreciation on your investment real estate- no matter how much you own. Do not confuse this with the rule for personal residences. While you can only deduct interest on up to 2 personal residences, you can write off unlimited investment interest. The IRS also allows you to take a paper write off (depreciation). You can depreciate the structure (not the land) as if it would be worth nothing at the end of 27.5 years! Of course we all know that the property will probably be worth much, much more in 27.5 years than it is now -not less. Nevertheless, on a 100,000 house (assuming, for example sake, the structure is worth 80% of the total) we are allowed to write off nearly $3,000 in depreciation alone each year! 4. FREEDOM - While there is some management and record keeping required, it is nothing compared with some other investments. If you invested in a business such as a dry cleaners or a restaurant, you would be married to the place, putting in countless hours. Real estate investing can be done without too much interference with your current job. 5. SOMEONE ELSE PAYS FOR IT - With real estate, the people who occupy your buildings (tenants) pay you rent every month that you then use to pay the mortgage. The tenants literally buy your investment property for you! When you invest in stocks, bonds, or precious metals, you are the one who has to pay for it. 6. CASH FLOW - Real estate provides you with a monthly cash flow. This can be some very significant income, especially after the loan is paid off! 7. SOLID ASSET - Real estate is widely recognized as one of the greatest assets to have. It is looked upon favorably by anyone looking at your financial statements. Real estate is also easy to borrow against should you need extra capital. Once you understand all of
the advantages of investing in real estate, it is easy to see that very few, if
any other investments can match real estate.
Why Invest In Single Family Homes? We have discussed the value of investing in real estate, but why single family homes? Why not invest in raw land, apartment buildings, shopping centers, or office buildings? There is certainly nothing wrong with these other types of real estate - if you know what you are doing. But single family homes have many advantages over other forms of real estate. 1. SMALLER AMOUNT OF MONEY NEEDED - The average person simply does not have the money to go out and buy a shopping center or apartment building. As was discussed before, it is possible to buy a single family home with 10% or less down payment. This means that you can buy a $100,000 house for only $10,000 down. It is entirely feasible for the average person to save $10,000 to buy their first investment property. Single family homes are great for the average investor. 2. PEOPLE ARE FAMILIAR WITH HOUSES - Most people are not comfortable with shopping centers or apartment buildings. They don’t know what rents are going for, repair costs involved, etc. On the other hand, most people do understand single family homes. They probably have seen the value of their own home go up over the years. They know psychologically that it is a good investment. They know roughly what it costs for repairs. People buy what they are familiar with! 3. MORE FLEXIBILITY - Let's assume that for the same amount of money you could either have 5 houses or 1 apartment building. If you needed money, with the apartment you could either have to sell the whole thing, refinance the whole thing, or bring in a partner on the whole thing. With the 5 houses, you could sell one of them, refinance one, or bring in a partner on just one. It is comparable to having five $20 bills versus one $100 bill. If you go in to buy coffee at the convenience store with the $100 bill, they might not take it. Like the $100 bill, the apartment building can be harder to get rid of. Houses are more liquid. In most areas single family homes sell in 120 days or less. Apartments can take much longer. More people can afford single family homes and more people want them. 4. MORE CONTROL - With an apartment building, all of the tenants know each other, and they will know what they pay in rent. That means it is difficult to charge one tenant higher rent than another. Plus, if one tenant plays the stereo too loud or causes other problems, YOU will get the complaints. With houses, they are generally scattered around the area. You can raise the rents individually, offer lower rents to excellent tenants, etc. 5. HIGHER EQUITY BUILD-UP - There is usually more appreciation in single family homes than in apartments. Apartment buildings are valued based on the income approach (how much money they bring in). Single family homes are valued based on comparable sales. This means that your investment houses are valued according to what the other homes in the neighborhood are selling for. Owning your own home is part of the American dream. A home is a psychological desire. There is certainly more demand for houses than apartment buildings. In the Seattle real estate market, appreciation will likely occur much faster than in many other locations throughout the United States. 6.
LESS CHANCE OF RENT CONTROL - Rent control is where the government tells you how much you can charge for
rent. In many big cities with rent control, buildings have been abandoned
because the owners could not charge enough rent to cover their costs. As a
property owner, rent control is a very bad thing. Fortunately for the single
family home investor, most rent control laws only apply to buildings with 4 or
more units.
7. LESS RISK - With single family homes, you don’t have all your eggs in one basket. The homes are usually scattered around the area. With an apartment building, if the area goes bad for some reason (i.e. a factory or freeway goes in across the street) you are sunk. Single family homes also tend to attract a better class of tenants than apartments. Apartment dwellers are usually more transient- single people or young couples that will soon outgrow it and want to move to a house. Single family homes generally attract a more stable tenant- like families with kids in school who are less apt to move frequently. Additionally, most people who live in apartments won’t do minor repairs and maintenance like those living in a house. Other forms of real estate are fine, but they may require more money and sophistication than the average investor has. It is easy to see that single family homes are a fantastic investment for just about everyone. What Are The Drawbacks? It would not be fair to have a discussion about investing in single family homes without covering the negatives also. Every investment has some drawbacks, no investment is “perfect”. 1. MANAGEMENT- All real estate requires management, either by you or a professional management company. There are more headaches involved with real estate than with simply putting your money in a money market account or mutual funds. Single family homes are more difficult in some respects because they are spread out. This makes it harder for showings and repairs versus an apartment where all the units are in one location. There is also more paperwork, because each house has its own mortgage, property taxes, insurance, etc. Management takes some time, but if you develop a system and stay on top of it, it is not all that hard. 2.
VACANCY - All real
estate can suffer from vacancy from time to time. In the
3. REPAIRS - Any real estate is going to require repairs occasionally. Single family homes each have their own furnaces, air conditioners, roofs, etc., unlike an apartment building. Houses may therefore have more repairs, although they will generally be less expensive repairs than for a larger building. Apartments also require things like landscaping maintenance and snow removal, things that a tenant often does in a single family home. In addition, tenants in houses often perform a lot of minor repairs themselves. Where Do You Find The Houses? It almost goes without saying that you want to buy the houses for the lowest possible price. But where do you find these deals? They certainly don’t walk up and knock on your forehead (unless you are a real estate agent). This means that you need to have an advocate to actively go out and look for them. This is where Lindee and I come in the picture. As your buyer representative, you will benefit from our system for locating motivated sellers. What is a motivated seller? It is a seller who, for whatever reason, is anxious and compelled to sell their house as fast as possible. These sellers will likely sell for less than market value, often considerably so. They will sell below market, and shake your hand and thank you for buying it. They had a problem, and you helped solve it. You got the “monkey off of their back.” Do not ever feel like you are taking advantage of a seller. Remember, if you don’t buy it, someone else will! What would cause a seller to be in a situation where they need to sell fast? There are many possible answers, but here are some of the most common: 1. DIVORCE - About 25% of all home sales are the result of divorce or family problems. While this is unfortunate, it provides some great opportunities for the investor. There are cases where one spouse will agree to sell the house very cheap just so that the other will get less proceeds. Often in messy divorces the court will order the sale of the house, so it MUST be sold. When people are highly emotional, they will do things that are sometimes hard to believe, like accepting a low offer on the house! 2. DEATH - This is also unfortunate, but it is something that happens eventually to all of us. Sometimes the sale is motivated by emotion, like where a spouse does not want to stay in the same house after the other spouse dies. Other times it is more financial, where the home can no longer be afforded without the deceased. In many cases, there are large estate taxes to be paid. If the inheritors of the estate do not have the cash to pay the taxes, they will sell off assets like houses to pay the taxes. If they don’t, the government will step in and force an estate sale to generate the money owed for the taxes. 3.
JOB TRANSFER - When
a person is dependent on their job and they get transferred, they sometimes
must move quickly. Often one spouse will move on to the
4. BOUGHT ANOTHER HOME - In many cases a seller will purchase another home before their existing home is sold. They may need to sell the existing home before they can close on the new one. Sometimes they may close on the new one, move into it, and leave the old one vacant. Either way, the motivation to sell can be large! 5. FORECLOSURE - When the owner of a home doesn’t make the payments, sooner or later the bank will foreclose on the property and take it back. Depending on state/local laws, the foreclosure process can take anywhere from 4 to 15 months. This leads to 2 different opportunities. The first is where the foreclosure process has been started, and the owner is still living in the property. They may be highly motivated to sell because soon the bank will complete the foreclosure and they will be forced to move out… with a foreclosure on their record if they don’t sell it first. The other is where the bank has completed the foreclosure and now owns the house. It is controlled by the bank’s real estate owned (REO) department. The REO department does not want to own houses, and will attempt to dispose of them as soon as possible, often at substantial discounts. 6. VACANT HOUSES - Any of the above 5 situations can lead to a vacant house. Any time you see a house that is sitting vacant, you see resources being wasted. Whoever owns that house is either making payments on it every month or, if they own it free and clear, missing out on the use of the money somewhere else. No matter what the situation, a vacant house is usually a good sign of a motivated seller. How Do You Select And Buy The Houses? So how do you determine what houses to buy? What criteria is used to evaluate potential investment houses? How do you buy them, and what do you do to get them ready to rent? We can help you with man of these questions. The process involves following a few simple guidelines. 1. TYPE - The most important thing to remember here is to follow the law of supply and demand. What type of house appeals to the most people? In most areas, this is a 3 bedroom, 2 bath, 2 car garage detached house (3/2/2). This is not to say that a 4 bedroom is no good. If you come across a 4 bedroom that is a great deal and meets all the other criteria - by all means buy it. What about condominiums or townhouses? While generally not as good as a house, they do have the advantage of being easier to maintain because a homeowners association (HOA) handles the maintenance. That is also, however, one of the drawbacks to a condo/townhouse. The HOA fees are often high ($100 per month or more), and they often continue to go up. Furthermore, many HOAs hold the owner responsible for the actions of the tenant. So you could end up getting fines because your tenant doesn't park in the right spot or plays the stereo too loud. Most of these HOAs have the power to put a lien against the title of your property for money they claim you owe them, such as fines or special assessments. In extreme circumstances, these HOAs can turn into ugly battlefields with bitter disputes among neighbors. A condo/townhouse is usually harder to sell than a house. They also tend to have a higher proportion of renters than owners. As a rule, the best investment properties are in areas where a majority of the residents are owners. A condo/townhouse can be an excellent investment, just make sure to do some homework. 2. LOCATION - Look for an average house, in an average neighborhood, to rent to an average person, and, down the road, to sell to an average person. You want a middle income area with the widest appeal. Avoid homes that are on a busy street or back up to a busy street. If you can find a home on a cul-de-sac or corner lot, that’s great. You should research home sales over the past few years. A real estate agent can help you with this, or you can go to your county records. Pick an area where values are steadily increasing. As for age, a newer home will generally require less in repairs, although this is not always true. 3.
For example, if the average home in your area is selling for $140,000, the best rentals may be in the $110,000 to $130,000 price range. In addition, this is a price range that should be easy to sell in the future, when the time comes. High priced or luxury homes are generally not recommended. They are usually hard to rent for enough to cover the payment, and if they go vacant for a while it can cost you plenty. Many tenants who rent luxury homes do so only for short terms, leaving the owner with another vacancy. On the other hand, if prices are increasing rapidly, a higher priced home may appreciate more in gross dollars. Lower priced homes are also not the best. The main problem is management and low priced homes are often in areas that have low appreciation. Of course, these are generalities and not always true in every case. 4. FINANCING - There are many different ways to buy properties, but they all fall pretty much into the following categories. CASH PURCHASE - This is simple, just like it sounds. The buyer pays the entire purchase price in cash without getting a loan for any part of it. In this case, the buyer/investor would have a large cash flow because there is no mortgage payment. There is nothing wrong with this, except that the buyer is not taking advantage of the leverage of getting a loan and is tying up more money than necessary. If a buyer paid cash for a $100,000 house, he could have instead used the money to put a 10% down payment on ten $100,000 houses and own ten homes instead of just one. Of course, most people simply don’t have enough money laying around to pay all cash for a house NEW MORTGAGE - In this case (the most common) the buyer makes a down payment and goes to a bank or mortgage company to get a loan for the balance of the purchase price. The bank will put a lien against the property so that if the payments are not made, they can repossess it. The buyer will be required to fill out a loan application and the bank, depending on the amount of the down payment, will run a credit report, verify the applicant’s employment and bank accounts, and analyze the debt to income ratio. The interest rates and fees charged can vary significantly, so a prudent buyer is well advised to shop around to different loan companies before going through the application process. SELLER FINANCING - This is where the seller acts like a bank and loans you the money to buy his house. For full seller financing, the seller must own the house free and clear (no loans against it).The seller will usually require the buyer to make a cash down payment, and then put a mortgage (lien) against the property for the balance of the purchase price. The terms such as interest rate, down payment, length of loan, etc. may all be widely negotiable. The advantages to the buyer are that the seller will often not require a full loan application and credit checks, and the seller usually does not charge all the miscellaneous fees that the banks normally do. The seller gets to earn a good return on his money that is secured by the property, and will have the gain from the property spread out over a number of years, which may help with the seller’s tax situation. Seller financing is good if you can get it, but a relatively small percentage of sellers own their homes free and clear and many don’t want anything to do with carrying the mortgage. It is always worth a try. ASSUMPTION - Prior to 1988, all FHA and VA mortgages were assumable without qualifying. Many investors scooped up properties by simply assuming these loans with small down payments. Those days are all but gone. There are still some of the old loans around, but the equities are big so that the buyer either has to come up with a huge down payment. For example, if a property selling for $100,000 had an underlying assumable loan of $50,000, the buyer would have to put a $50,000 down payment. If the seller would carry a second mortgage, then the buyer could put a down payment of $10,000 and the seller would carry a second mortgage of $40,000. Most all of the newer loans are not assumable or require the buyer to qualify to assume the loan just like for a new mortgage. CONTRACT OF
Most all mortgages have an “acceleration clause” that allows the mortgage holder to call the entire loan balance immediately due and payable if title or interest in the property is transferred without their permission. There are too many details and possible situations to go into here, but suffice to say you can get into a lot of trouble with this one if you aren’t careful. 5. PREPARING THE HOME FOR RENT - It makes good sense to try to buy homes that require the least amount of work, but sometimes the best deals are on homes that need some attention before they are ready to rent. Do not make the mistake of trying to rent a home if it is not in good condition. The only tenants who will be willing to rent it are messy and figure that since the house isn’t in good condition anyway, it doesn’t matter if they trash it. So what does good condition mean? INSIDE - The two best things that you can do, that make the biggest difference for the least amount of money, (in addition to a thorough cleaning) are carpet and paint. Fresh carpet and paint make a house smell, feel, and look new inside. As for color, go with neutral, nothing flashy. For paint, use an off-white with a beige tint for a soft, cozy feel. Don’t use a gray- it gives a cold and drab feeling. Never put up wallpaper, you will regret it down the road! For carpet, go with something in the beige-brown range that is neutral yet will hide some wear and tear. Use a low to mid range carpet but go with a higher end pad. The nicer pad doesn’t cost that much more and it makes the cheaper carpet feel like a more expensive carpet and it also makes it last longer. OUTSIDE - The idea here is to “gingerbread” the exterior, give it what is referred to as “curb appeal”. The house should look nice and well kept- the kind of place people would want to live. The first thing to do is paint the outside if it needs it. Again, you should use neutral colors that are common to other homes in the area. As you buy more and more houses, you can save money and confusion by buying large cans of paint and painting all of your houses the same colors. It makes touch ups easy because you never have to try to remember what color you painted it! Other items are having a nice looking front door, mowing the grass and trimming the trees and bushes, planting flowers, etc. Many people elect to do the repair work themselves, and this may make sense in some cases. Never take time off from work to do the repairs if you have a high paying job. It is silly to take off from a job where you make $30 per hour to go do a repair job that you could hire someone to do for $10 per hour. Often when you hire the job out, it gets done much faster, meaning less time that you are making the payment on an empty house. Plus, when you hire it done, you can write off the entire cost of the job. When you do it yourself you can only write off the materials. 6. BUY-FIX-SELL - Many people like the idea of buying houses, fixing them up and then selling them, hoping to make a profit. It is possible to do this, but you must be very careful and know exactly what you are doing or you will get burned. First, once you buy the property, you need to fix it up. Depending on the amount of work, this can take a couple months. During this period you are not only paying for the repairs, but also the mortgage payment. Once the repairs are done, it can take several more months to sell the house, which means more payments on a vacant house. When it does sell, the average selling costs (with commissions, closing costs, taxes, etc.) are near 10%. It is easy to see that you would need to buy the house for at least 25% under good condition market value for this to pencil out. If you are off on some of your estimates, or pay too much for the house, you can lose a lot of money fast. How Do I Handle The Management? Good management is critical to being successful at investing in single family homes. In fact, even if you do everything else properly, you’ve got big problems if you don’t know how to manage the houses and the tenants. Finding and buying the house is only part of the job. Repairs and vacancies are the two biggest problems that you will face, and too much of either will turn a good investment into a bad one. Both of them are the result of bad management. Record keeping is critical. Make sure you have everything for tax time and in case of an audit. Fortunately, once you learn the rules and “tricks of the trade” you can easily put together a system that will allow you to avoid most of the management nightmares. Selecting tenants is without a doubt the most critical management decision you will make. The profitability of your investment depends on it. So how do you find good tenants? You can either turn the whole job over to a professional management company, or do it yourself. The first option is certainly easier, but a professional will usually charge you around 10% of the gross rent every month. This may be alright down the road when you have plenty of equity and a large cash flow to afford it, but investors starting out can be well served to learn the ropes themselves. The two most frequently used methods to actually find the tenants are a classified ad in the newspaper and a FOR RENT sign in the yard. In most cases these methods will be adequate. The important thing is how you screen and qualify the tenants. You may be tempted to just take any renter that comes along without any background check because they “seem nice enough.” THIS IS NOT A WISE MOVE! People are not always what they seem. It is better to have a vacancy than a bad tenant. The first step is to tell all prospective tenants that call you: “Thanks for calling. That home is an excellent one, and it is still available. I’d be happy to show it to you. First though, I should tell you that we require a $35 non-refundable application fee and that all references and past landlords are checked, in addition to a credit report. Prior to move in we require the first month’s rent, a security deposit of _______, and a refundable cleaning deposit of $275. Do you still want to see it??” You will eliminate most all of the bad tenants right then and there. If they know that you are going to check them out, and they have a lousy record, they won’t even waste their time (or yours). You may be thinking that by following these rules you might not get any tenants. NOT TRUE. Nice, sharp looking homes in good areas are always in demand. Before you agree to meet a prospective tenant at the house, make sure to get their name and phone number. Not only can you then call them if you get delayed, but they are much more likely to show up (or call you if they can’t make it) if they know you have their phone number. When you do meet a prospective tenant at the house, be polite and respectful (this goes for on the phone, too). Take a look at their car. If it is filthy and full of trash and half eaten Dicks hamburgers, that is probably how your house would end up looking if you rented to them. Let them in and allow them to take a look for themselves. You should casually mention any features or benefits that are not obvious. You need to let them know that you are a serious investor, and that you will make any necessary repairs promptly. Strike up a conversation by asking questions such as: “How long have you been in town?” and “Where do you live now?” and “Why are you moving?” and “How long of a lease are you looking for?” and “Where do you work?” and “How many of you would be occupying the home?” Listen to how they answer these questions. If they say something like “We are moving because our last landlord was impossible to deal with,” you may have some concerns. If they are sincerely interested, you’ll know it. Don’t try to oversell the place, you will seem desperate. Ask if they want to fill out an application. If so, encourage them to fill it out on the spot, and collect their $35 application fee. Tell them it usually takes less than 24 hours to process, and you’ll call them promptly either way. If they prefer, give them an application to take with them and bring back to you later. If you are managing a lot of houses, you may want to get an account with a credit bureau to run credit checks yourself. Otherwise, it makes sense to use an outside service. Many of these services will run the credit check, call and verify past landlords, employment, and bank accounts for you for around $18-30 (that’s what you use the application fee for). It’s a good idea not to put too much weight on what their current landlord says about them. If they are a problem tenant, many landlords will lie and tell you they are great so that you will take them, and they won’t have to deal with them anymore. It’s best to go back to the landlord prior to the current one, if possible. Remember that people are creatures of habit. If they are slobs or slow payers… they will continue to be. If the prospective tenant checks out O.K. and you don’t have any bad feelings or other concerns, call them and let them know the good news- they’ve got a house! Arrange a meeting for them to sign the lease agreement and pay the required up front money. Be careful not to call the security deposit the last month’s rent, and do not make it equal to a months rent. If the monthly rent is $1,000, make the security deposit $1,250 or so. The reason is that at the end when they are going into their last month, you don’t want them to think that they can just use the money they paid at the beginning. Make them pay the rent for their last month at the beginning of that month as usual. After they move out, if everything is alright, then refund the security deposit. They will be a lot more careful and leave the house in better condition if they know that their deposit is on the line. If they are paying by check, never allow the tenant to move in prior to making sure that it clears. If the check is drawn on a local bank, go there and cash it. If the move-in date is within a day or so, require them to give you cash, money order, or a cashier’s check. This meeting is also the time to let the tenant know what you expect of them, and what they can expect from you. You will avoid a lot of potential problems if you spell everything out in the lease agreement. Since the goal is to find long-term tenants, you don’t want to accept anything shorter than a one year lease- longer if you can get it. Every time a tenant moves out you have wear and tear on the house, a vacancy, cleaning and repairs, and the hassle of finding another tenant. The best tenants are the ones who stay for years without ever causing you any problems. If you live in a cold weather state where it may be difficult to find a tenant in December, January, or February, don’t make the lease expire in these months. Run the lease for 14 or 16 months if necessary, and explain why to the tenant. Let the tenant know that you are serious about your investments, and that you follow your policies strictly. As long as they follow the rules, the two of you will have a good relationship. If they don’t, you will swiftly take action to protect your investment. (Please note: Landlord-tenant laws vary widely from area to area. Before implementing any rules, make sure that you are not violating any local or state laws). Be very clear that rent is due on the 1st of the month, and if it’s not in your hands by the 5th you will immediately start eviction proceedings. No matter how tempting, do not ever accept partial rent payments, as you may have to start the entire eviction process over, and it sets a bad precedent. There is a $20 per day late fee after the 5th. There is a $30 charge for a returned check, and once they bounce a check they must pay with money orders or a cashier’s check from then on. Do not allow them to sub-let the house. Put a limit on how many people can occupy the house (i.e. 2 adults and 2 children). They pay for any legal fees incurred in your having to go to court to enforce the agreement. It is best not to allow pets, and put this in writing. If you do allow them, state how many, what type, and get a bigger security deposit. Smoking should not be allowed in the house. The costs involved are not worth the trouble, especially with the insurance issues these days. The tenant should be responsible for any repairs under $50 or so. You don’t want the tenant to call you for every silly little repair. On the other hand, don’t set this amount too high or the tenant will simply ignore the necessary repairs and let the house slowly go downhill. The tenant should be responsible for replacing the heating/cooling system filters, maintaining the lawn and landscaping, snow removal, etc. The tenant must notify you immediately of any major problems that need repair. Tell the tenant that any extra appliances like refrigerators and washers and dryers are there only as a convenience, they are strictly “AS-IS”, and you take no responsibility to repair or replace them. The key to avoiding vacancy and related problems is to have good, long term tenants. Try to get them attached to the house. Encourage them to work on it. Offer to supply the materials if they want to do some worthwhile improvements to the place. If you are paying for part of an improvement, never allow them to deduct it from the rent. Get copies of the receipts, and then write them a separate check. This is much better from a tax standpoint. You can also tell them that when you are ready to sell it, you will give them the first right to buy it. This would be good for you because you would have no vacancies, real estate commissions, etc. The goal is to create a psychological attachment between the house and the tenant. The tenant will take much better care of the house if they think it might be theirs someday. You should drive by the house frequently, and go inside to check at least every 3-4 months. Try to make fairness your guide in dealing with the tenants. Enforce your rules strictly, but treat them with respect. Once they know your position, they will be unlikely to break the rules, because they know the consequences if they do. You may want to reward good tenants by not raising their rent, or giving them $50 or $100 off of their rent in December. Often the little things can mean a lot. When And How Do I Sell The Houses? This depends on your goals, the area, the market, etc. Many people hold the houses until they double in value. Others hold them until the mortgage is paid off. Still others hold them for a specified period such as 7 or 10 years. Some investors don’t sell at all unless the neighborhood peaks out and values start to go down. You would be smart to monitor values on a consistent basis. This is not to say you should panic and sell every time there is a little glitch in the market. But if the area has started going down while other areas are going up, you may want to sell and do a 1031 tax free exchange into a property that is appreciating better. Some investors hold the properties until they are free and clear (assuming the values are stable). They can then sell them by taking a down payment and carrying the mortgage themselves. This can provide them with a good, stable cash flow for many years. How Do YOU Get Started? We hope this information was of some value. There is so much more to this process, but this should help you get started. We offer a FREE, no obligation review of your situation. It normally only takes about 30 to 40 minutes. We’ll go over some questions, and determine where you are at, and where you want to be. No big sales pitch, no pressure… just honest information. We have many people find the just the right property for their needs over the years. Our experience could help to save you a great deal of time and money. When you hire us to be your representative, you’ll be totally informed on market values, and will be the first to know about hot new properties the moment they become available! We’d be happy to prepare a customized plan for you and get started on your search. If you decide to wait or otherwise change your mind, that’s okay, too. We understand how things change. When you are ready, just pick up the phone and call us (206)940-8319 Thanks, and we look forward
to hearing from you.
Sincerely,
Cal and Lindee Stanford
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